Low interest rate environment invigorates real estate investments

Low interest rate invigorates real estate investments

Sentiment on the Swiss real estate investment market is moderately optimistic once again after two cautious years. The Price Expectation Index has risen significantly despite considerably more pessimistic assessments of future economic trends. This general ambivalence is attributable to both the scrapping of the minimum euro exchange rate and the introduction of negative interest rates. That is only one of the many findings of KPMG Switzerland's annual “Swiss Real Estate Sentiment Index”.

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The aggregate Swiss Real Estate Sentiment Index (SRESI) stands at 14.8 index points (pts.) for all participant groups, a considerable improvement of 20.1 pts. over the previous year. Sentiment on the Swiss real estate investment market is thus back in the positive range, albeit only slightly, after two cautious years. To a large extent, this is attributable to the sub-indicator “Price expectation for investment property”. The Swiss National Bank's decision last January to abandon the minimum exchange rate and particularly the introduction of negative interest rates have given Swiss real estate a boost as an investment class.

Aggregated Sentiment Index according to participant group

Price expectations uncoupled from economic prospects

At -45.2 pts., the survey participants' assessment of the economic situation is considerably more negative than it was in the previous year (10.1 pts.). Over half of respondents anticipate a deterioration in the economy in the next twelve months. Meanwhile, the price indices for central locations (92.7 pts.) have risen further and a positive price trend is once again expected in medium-sized towns (14.5 pts.). Less than 3% of respondents expect to see prices drop for central locations, one fifth feel this way with regard to medium-sized towns. The Price Expectation Index for peripheral areas has dropped even further. This index currently stands at -77.7 pts., making it the fourth year in succession that it is in negative territory. This trend points to growing pressure on the yields generated by real estate in high-quality locations. Overwhelming pressure to invest is increasingly prompting investors to seek out investment properties with a higher risk level and this, in turn, could cause investment pressure to expand to medium-sized towns, as well.

New record for residential investment properties

At 74.3 pts., the Price Expectation Index for residential properties has exceeded its previous record level of 73.4 pts. from 2012. Residential investment properties still remain the only use segment where price trends are expected to be positive. Strong demand for residential real estate as a “safe investment” is probably being driven in part by a persistent low interest rate environment and the accompanying lack of investment alternatives. Expectations regarding the price trend for office properties saw another slight improvement; however, at -84.4 pts., the index is still in very negative territory. Survey participants anticipate further price adjustments in this use segment over the course of the next 12 months. After the situation had relaxed somewhat during the past year, a negative price trend is expected to return in the other commercial use segments (not including special-purpose properties). Nearly stable price trends are anticipated once again for special-purpose properties, which have consistently improved over the past few years, albeit in very small upward steps. One interpretation of this trend is that special-purpose properties, for lack of any alternatives in the other use segments, are being accorded a certain amount of potential as an investment group. Increased price expectations for central locations are also reflected in the detailed analysis, which is broken down by financial center. The sub-index has risen for all eight centers. Except for the Lugano and St. Gallen regions, all survey participants now expect moderate price increases in all financial centers.

Supply remains scarce

The availability of suitable investment properties to satisfy acquisition goals is unchanged from last year across all market segments. The major shortage of adequate offers already identified in the residential segment is expected to increase even further. In the index, this is reflected in a decrease from -126.9 pts. last year to -136.0 index points in the current year. Supply in the commercial segment is considered adequate; however, respondents expect the supply of suitable investment options to improve slightly in the office (24.4 pts.) and commercial/industrial (9.1 pts.) market segments. A moderate shortage is anticipated for the retail (-9.0 pts.) and special-purpose property (-38.2 pts.) segments.

Higher risk perception

58% of participants expect market risk to increase over the coming 12 months. This corresponds to an increase of 8 percentage points since last year. As before, the effects of developments in Europe, interest rate risks and stricter regulations are identified as the greatest risk factors. While the assessment of the risk of a possible change in interest rates has increased compared to previous years, concerns regarding a further tightening of the regulatory environment are subsiding slightly. This reduction may be due to the fact that the industry has just recently been exposed to a number of regulatory measures. Stricter regulations appear to be of concern to developers, professional investors and real estate companies, in particular. Nonetheless, 44% of investors are inclined to accept some greater element of risk in their real estate investments in the coming 12 months (last year: 29%).

Methodology

The KPMG Swiss Real Estate Sentiment Index (SRESI) serves as an advance indicator for anticipated developments on the Swiss real estate investment market. The main index is generated from assessments of economic developments and price trends on the real estate investment market. The sub-indices reflect the assessments of market players in terms of individual market and use segments. This data was first collected in 2012 and the survey is repeated every year to generate an index, which permits a comparison of market assessments over time. Investors and appraisers of Swiss investment properties are invited to participate in the survey. Additional information on one focal topic that is currently of interest to the industry is also collected within its scope. This year's survey addresses the topics of portfolio and asset management.